Priority Technology - Q4 2022

Transcript

Operator (participant)

Good morning, welcome to the Priority Technology Holdings Fourth Quarter and Full-Year 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Chris Kettmann. Please go ahead.

Chris Kettmann (Partner)

Good morning, and thank you for joining us. With me today are Tom Priore, Chairman and Chief Executive Officer of Priority Technology Holdings, and Tim O'Leary, Chief Financial Officer. Before we give our prepared remarks, I would like to remind all participants that our comments today will include forward-looking statements which involve a number of risks and uncertainties and may cause actual results to differ materially from our forward-looking statements. The company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events, or otherwise. We provide a detailed discussion of the various risk factors in our SEC filings, and we encourage you to review these filings. Additionally, we may refer to non-GAAP measures, including but not limited to EBITDA and Adjusted EBITDA during the call.

Reconciliations of our non-GAAP performance and liquidity measures to the appropriate GAAP measures can be found in our press release and SEC filings available in the Investors section of our website. With that, I would like to turn the call over to our Chairman and CEO, Tom Priore.

Tom Priore (Chairman and CEO)

Thank you, Chris, and thanks to everyone for joining us for our fourth quarter and full-year 2022 earnings call. Before going into our financial results, I would like to highlight a few key takeaways about the current business trends as you absorb the Q4 performance and project it into 2023. First and foremost, the business is performing the way we anticipated. Consistently growing market share in SMB acquiring and producing strengthening results in B2B and enterprise payments. While other companies are paring back in response to uncertain macroeconomic conditions and the recent banking turmoil, we're driving forward on the strength of our counter-cyclical business lines that we're positioned to benefit from higher interest rates and the current economic environment. Second, not only are we outperforming our peers, but the key metrics in our business have continued to improve.

Our full-year 2022 growth rates and margin expansion are representative of the first quarter trends we have seen to date in 2023. Last, our decision in 2022 to accelerate investment in Passport, our Unified Commerce API, combining full-featured payments and Banking-as-a-Service, is proving somewhat prescient given the recent struggle of the banking sector and the general crisis of confidence in banks among businesses of all sizes. I'll speak in more detail on this topic toward the conclusion of our call, but suffice to say that the current pace of new partners adoption of Passport to collect, store, and send money will fuel results in the quarters and years ahead. With that as a backdrop, let's dig into the numbers.

As you saw in our earnings release, we continued our positive momentum with an exceptionally strong fourth quarter to close out a strong 2022. Our fourth quarter revenue increased 23% from the prior year to a record $177.6 million, which led to a 25% increase in gross profit to $61 million and a 21% improvement in Adjusted EBITDA to $39.8 million. For the year, revenue increased 29% to $664 million, growing organically by 23% in the fourth quarter and 19.1% in 2022. Full-year adjusted gross profit and EBITDA both grew 46%, with adjusted gross profit reaching $226.9 million and Adjusted EBITDA coming in within our target at $140.3 million for the full-year 2022.

Adjusted gross margin of 34.2% increased 410 basis points from 2021, demonstrating the operating leverage of our purpose-built platform. As I earlier noted, we anticipate that our strong fourth quarter performance and established trends in our business channels will continue. We are expecting to deliver consistent double-digit top line and bottom line growth, projecting revenue of $740 million-$755 million and Adjusted EBITDA of $160 million-$165 million for the full-year 2023. For those of you who are new to the company, Slide 7 highlights the architecture of our proprietary Unified Commerce Platform that is purpose-built to collect, store, and send money, combining robust payments and banking functionality to monetize the merchant networks we serve.

Our customers and the current market conditions continue to reinforce our belief that systems combining features of both payments and banking to accelerate cash flow and distribute funds to multi-party environments will be critical as businesses put greater demands on software and payment solution providers. We are committed to meeting their growing demand by simplifying the customer experience for our partners and making working with Priority as easy as 1, 2, 3. Partners simply choose the application that best fits their business, whether that is a small business operator choosing from MX Merchant and the MX POS suite, an FI or a middle market customer adopting CPX for automated payables, or an enterprise partner connecting to us via our API. They select the Passport financial tools that best fit their needs and begin to move money.

At this point, I'd like to hand it over to Tim, who will provide further insights into our segment level performance during the fourth quarter and full-year, along with current trends in each that inform our guidance for the upcoming year.

Tim O'Leary (CFO)

Thank you, Tom, and good morning, everyone. As I review the full-year and fourth quarter financial results, including the segment level contribution to the consolidated results, please refer to the supplemental slides or the MD&A for further details. Our MD&A is included in the Form 10-K that was filed with the SEC this morning and provides a discussion of our comparative full-year results. A link to that filing can also be found on our website. As Tom mentioned, we had strong financial performance across all business segments in both the fourth quarter and for the full-year. I won't reiterate the financial highlights that Tom already spoke to for both of those time periods, but before I go into the segment level details, I do want to provide a few other key metrics as it relates to the full-year consolidated results.

For the full-year, we had almost 15% growth in bank card dollar volume across all segments to roughly $62 billion. We had 10.5% growth in bank card transaction count to 640 million transactions and just under 4% growth in average ticket size to $96.50. If you include ACH, debit, and other volumes, the total payment volume for the year was $112.8 billion. Those metrics are all for the consolidated business. I'll now go into more detail on each of the business segments results for the fourth quarter. Let's start with SMB payments on Slide 10. For the fourth quarter, that segment had revenue of approximately $150 million, which was an increase of 23% over the prior year's fourth quarter.

This strong growth was almost entirely organic and was driven by a combination of over 7% growth in bank card dollar volume to roughly $14.9 billion, which included 9% growth in bank card transaction count and was slightly offset by a decline in average ticket size to $92.61 from just over $94 in the fourth quarter of 2021. We finished the quarter with 259,000 merchants, which represents an increase of 7% from the prior year. The average merchant count for the quarter was just over 257,000, which is also 7% growth from Q4 of 2021. This growth in merchant count was driven by continued strong boarding trends, where new monthly merchant boards averaged 4,600 per month throughout the quarter.

That compares to an average of 3,600 per month in the fourth quarter of 2021 and an average of about 4,700 per month for all of 2022. Continuing with SMB on the next page, but moving down to P&L to focus on profitability, we also saw strong performance with adjusted gross profit increasing 18% to $36 million despite a 120 basis point decrease in adjusted gross profit margins. As discussed on prior calls, we've continued to see some margin compression across the acquiring portfolio as a result of our larger reseller partners driving more of the growth, but those partners also generally receive higher residual commissions. Lastly, for SMB, quarterly operating income increased by 42% to almost $15 million as a result of operating leverage within the business segment.

Moving to B2B payments, we had revenue of $2.8 million in the fourth quarter of 2022, which was a decrease of 48% from the fourth quarter of 2021. This decrease was the result of the previously discussed reduction in revenue from managed services due to the final wind down of certain programs with a large customer. To help put that wind down in context, managed services generated on average over $2.7 million of quarterly revenue in the first half of 2022. That compares to just over $300,000 in the fourth quarter as the program completed its wind down in October. Going forward, we expect to see a nominal amount of managed services revenue that will be generated by some smaller legacy programs.

Focusing on the CPX business within B2B, revenue for the quarter was relatively flat at $2.5 million, it was negatively impacted due to the timing of certain incentives. Normalizing for that, CPX would have grown almost 9% in the quarter. The growth in CPX was fueled by just under 8% growth in ACH volume from Q4 of 2021 to Q4 in 2022, and 11% growth in issuing volume. With respect to B2B's profitability on Slide 13, adjusted gross profit declined by 35% as a result of the managed services wind down. You can also see how the adjusted gross profit margin increased by over 12 percentage points during the quarter as the lower margin managed services business rolled off.

For the quarter, the B2B segment had an operating loss of $1.1 million as certain costs related to the managed services program weren't able to be fully removed from the P&L in Q4, but has since been reduced. Moving to the enterprise segment on the next page, Q4 revenue of $24.9 million was an increase of $7.7 million or 46% from $17.1 million in Q4 of 2021. As a reminder, CFTPay was acquired in September of 2021, so the strong year-over-year growth in Q4 is entirely organic and not the result of any grow over from the acquisition timing. Favorable trends in new enrollments, an increase in the number of build clients, and the benefit of rising interest rates all contributed to the fourth quarter revenue growth.

I would also highlight that the Q4 performance represents almost 15% sequential growth from the third quarter of 2022. As shown on the next page, adjusted gross profit for the enterprise segment increased by 50% to $23.3 million, and adjusted gross profit margins expanded by 300 basis points to 93.6%. Operating income for this segment also benefited from operating leverage, as exemplified by its 121% growth compared to revenue growth of 46%. We remain excited by the revenue and earnings opportunities inherent in the enterprise segment going forward. Operating expenses are shown on page 16 and totaled $42.8 million for the quarter, an increase of 20% from the prior year.

This change is primarily driven by increased expenses in the business resulting from investments made in both personnel and technology to support the strong growth experienced in 2022. Salaries and benefits of $16.9 million increased 41% from Q4 2021 as a result of both an increase in headcount and wage increases, which is consistent with industry and broader macro trends. The headcount increases supported growth across the company and were added in both the U.S. and at our development center in India. We finished Q4 with approximately 870 employees, including roughly 300 in India, compared to just under 800 at the end of 2021.

I do want to highlight that the $16.9 million of salaries and benefits in Q4 was only a modest increase from $16.4 million in Q3 as we remain focused on extracting operating leverage from the investments that have been made to date in both the team and technology. SG&A of $7.9 million increased 27% from $6.2 million in Q4 2021. Continued investment in the business expansion drove that level of growth. Consistent with my comments on salaries and benefits, we will continue to focus on our cost structure in order to drive operating efficiencies. I would highlight that the Q4 spend was almost $3 million lower than Q3 levels due to the roll-off of certain non-recurring expenses combined with lower marketing expenses following the Priority Power Conference that we hosted in September.

Depreciation and amortization of $18 million for the quarter increased modestly from the last year. Moving to the next slide, Adjusted EBITDA for the quarter was $39.8 million, which was an increase of 21% from $32.9 million in Q4 of 2021. Working down the EBITDA walk on this slide, I'll start with Q4, but also discuss the full-year results. The largest items added back to consolidated net income are obviously interest expense and depreciation and amortization. Interest expense of $16.3 million for the quarter is an increase of $4.4 million from Q4 2021 levels, given the impact of the rising interest rate environment and the floating rate nature of our existing debt.

On that topic, I would reiterate from prior calls that we do have a natural hedge in place for almost 90% of the floating rate debt, given the interest income we're able to generate on the deposits in the enterprise segment. If you include the floating rate component of our preferred stock, the natural hedge from the deposits cover about 60% of our floating rate liabilities. The further adjustments to arrive at Adjusted EBITDA for Q4 include non-cash stock compensation of $2.2 million and approximately $1.3 million of other adjustments, which consist of certain non-cash or non-recurring expenses. For the full-year, Adjusted EBITDA of $140.3 million includes an add back of $53.5 million for interest expense, $6.2 million of non-cash stock compensation expense, and $6.7 million of other non-cash or non-recurring expenses.

Moving to the outstanding debt slide on page 18, you'll note that our debt levels declined year-over-year. We finished the quarter with $623.2 million of gross debt and $604.7 million of net debt. This reduction is net of continued investments in the business and also after repurchasing $1.7 million of PRTH shares during the fourth quarter and $5.9 million during the full-year. From a liquidity standpoint, we had $27.5 million of borrowing capacity under a revolving credit facility, in addition to $18.5 million of unrestricted cash on the balance sheet at quarter end. I would also note that subsequent to Q4's quarter end, we've paid down another $6 million on the revolver.

On Slide 19, the preferred stock on our balance sheet totaled $235.6 million at December 31st and is net of $21.1 million of unaccreted discounts and issuance costs. The fourth quarter preferred dividend of $10.5 million is comprised of $5.3 million paid in cash and $4.3 million of a PIK component. That is supplemented on our income statement with the accretion of discounts and issuance costs of just over $800,000. Before turning the call back over to Tom, I wanted to further address our revenue and Adjusted EBITDA guidance for the full-year of 2023, which can be found on Slide 20 in the presentation.

Based on continued strong growth and trends in the business, we are forecasting 12%-14% growth in revenue to a range of $740 million-$755 million for the year. As I mentioned previously on the call, we are focused on leveraging the investments already made in the team and technology throughout 2022, which should lead to overall margin expansion during 2023. As a result, we are forecasting Adjusted EBITDA growth of 14%-18%, which will result in a range of $160 million-$165 million for the full-year. If you break that growth apart, we're forecasting continued double-digit growth in revenues from SMB. We also expect to continue to see some modest margin compression in the portfolio as our larger reseller partners continue to drive more of the growth in the business.

B2B's top-line growth will be skewed by having to anniversary the runoff from managed services, but we expect CPX to show continued growth that should also result in margin expansion for the segment given the higher margin profile of CPX compared to managed services. Lastly, Enterprise is forecast to continue its strong growth, although we have tempered expectations a bit throughout 2023 to account for the growth already experienced in the second half of 2022. Further, we expect the margin profile in the enterprise segment to remain consistent with its exit rate from 2022. With that, I'd now like to turn the call back over to Tom for his closing comments.

Tom Priore (Chairman and CEO)

Thank you, Tim. Before wrapping up, I'd like to speak to one of the more significant points we made during our Q3 discussion. During it, we called out our decision to accelerate investment in our banking product initiatives in the back half of 2022 that would lead to slightly lower bottom-line guidance, stating that we believe accelerating feature development of our native Priority Passport offering to deliver a full suite of proprietary payment and banking solutions into the SMB and B2B markets, as well as enterprise partners, will result in outside benefit to our shareholders in the coming years. We also highlighted research from leading research firms McKinsey and Bain about the trends in payments and banking commonly referred to as embedded finance. Their conclusions reflected that small businesses starting up today may never interact with a conventional bank.

By logging into their e-commerce or accounting platform, they can open a deposit account, order a debit card, and meet most of their financing needs to embed financial products into a single, seamless, convenient, and easy-to-use customer experience. They predict that the winners will likely provide a full suite of services, including some regulatory oversight, compliance, origination, and fulfillment. Enablers that take the hassle out of embedded finance for platforms through easy integration and great servicing should hold the upper hand. They can choose a high-volume self-service model or a higher touch operation across fewer, bigger platforms. The current crisis of confidence in the banking system will certainly drive more businesses to alternative solutions that offer greater transparency, speed of cash flow recognition, regulatory support, and diversification of banking system risk that traditional platforms cannot deliver.

Our systems are built for this future and are proving ready for the current test under fire. In addition to handling all forms of payments, credit, debit, ACH, checks, yes, even lockbox capabilities and wires and robust security and compliance, Passport's self-directed account opening process only needs an email for customers to get started. Our fast KYC and AML process can set up an account in less than 30 minutes. In fact, during the weekend of the SVB and Signature failures, new account setup time averaged 7 minutes. Once established, customers can set up their own virtual accounts near instantly. Importantly, as a licensed money transmitter regulated by FinCEN in all states, the funds in Passport are syndicated to our partner banking institutions and maintained in fully routable FDIC-insured accounts. Albert Einstein famously said that in the midst of every crisis lies great opportunity.

We're confident that we have prepared well for the present turmoil in the banking system and will emerge even stronger just as we did following the height of the COVID pandemic and the recent pressures from inflation and economic downturn. As many of our peers reduce investment in the wake of worrisome macroeconomic conditions and the igniting banking system fears, we remain confident in our investments into the convergence of payments and banking and even more keenly focused on our execution. We're positioned to benefit from opportunities emerging from the current uncertainty by providing transparent and secure unified commerce solutions that today's businesses need. In closing, I want to acknowledge my passionate colleagues at Priority who are fully committed to our mission and continue to deliver market-leading results. Thank you for your unwavering focus and the exceptional work you continue to deliver day in and day out.

There's no power greater than human passion, your passion to deliver great products and customer experience is the power that's driving Priority. We appreciate you all taking the time to participate in today's call and the ongoing support of our investors and analysts. Operator, we'd now like to open the call for questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question is from Brian Kinstlinger of Alliance Global Partners. Please go ahead.

Brian Kinstlinger (Director of Research, Managing Director, and Head of Technology Research)

Hi, guys. Thanks for taking all my questions, and thanks for all the details on Unified Commerce Platform. I believe that's what I've been calling the Banking-as-a-Service platform. Assuming that's right, can we talk about as this product launch you talked about it was imminent as of last quarter, how has early adoption gone outside the initial beta customer? What's the customer acquisition process for this, you know, new platform offering?

Tom Priore (Chairman and CEO)

Yeah, sure, Brian. I mean, look, so far, you know, it's been all smooth. You know, we're being very judicious about how we're rolling it out. It's been more focused on our enterprise and B2B customers initially. We'll be hitting the SMB segment. We've already launched beta into SMB, gathering more intel, you know, and focused on having that launched more fully on the latter part of May and June into, you know, just a broad base into the SMB acquiring segment. The, you know, it's been a really good test, quite honestly, because of the recent turmoil in the banking sector. You know, just give you a couple examples.

You know, kind of stated there, we had a lot of folks who were, you know, just needed to get accounts set up and move funds out of SVB or Signature. You know, they were average setup time for them to get established, do all KYC, AML checks, get them permission with credentials was 7 minutes. You know, it's pretty. I don't know how many platforms are equipped to operate at that level. We had folks that chose, instead of, let's say, setting up physical accounts, through our portal, would do it through the API and were integrating to our API for all of their payment operations. These were, you know, multi-billion-dollar players.

In 48 hours, they were set up and testing transactions and moving volume. It's, you know, it's ready for prime time. It is got a robust pipeline of enterprise partners either integrated or already or in the process of integrating. It's a fast process.

Brian Kinstlinger (Director of Research, Managing Director, and Head of Technology Research)

As it relates to those banks, Signature and SVB, that had challenges and you had companies that were able to set up in 7 minutes, were those customers that were already familiar and working in your backlog? How did they?

Tom Priore (Chairman and CEO)

No.

Brian Kinstlinger (Director of Research, Managing Director, and Head of Technology Research)

become familiar with to move so quickly?

Tom Priore (Chairman and CEO)

I mean, they were relationships that were familiar to us or were familiar with what we're doing. They were not existing customers.

Brian Kinstlinger (Director of Research, Managing Director, and Head of Technology Research)

Got it. Switching gears to CPX, I think you were clear that you expect growth this year and you could have had 9% growth. At least from how I personally expected it, I thought it would be growing faster over the years. Maybe talk about what's going on there in terms of onboarding business payments volume. What, if any, is the bottleneck, and how should investors think about this and when it might become much larger scale?

Tom Priore (Chairman and CEO)

Sure. Look, the, We saw very good wallet share growth or if you think of like, growth in existing logos during the last couple of years. So sales that had been made, folks had been on the platform, you know, did more volume, which, you know, which was great, and anticipated. Where we've seen slower sales cycle is harvesting some of the relationships that we've already, you know, set up. Premier, healthcare, for instance and, you know, their GPO. The, some of our FIs that, you know, we have contracted and are converting portfolios. Those implementation and sales cycles have been longer than, certainly we're satisfied with.

That's not, it's not due to technology so much as due to, you know, we've got to break through some of the inertia at the customer level. Look, the other thing we've done is, we just brought in three new salespeople. We've been expanding sales. You know, we felt we needed to put some a few more technological components in place so that salespeople could be highly effective. You know, we did that, as I think we noted. Not, not the least of which is the banking as a service component, right? Think about the experience of a buyer and your supplier network, you can permission supplier wallets or, you know, call it the supplier accounts on Passport, instantly, right?

Take all your supplier information, upload them into our system, take all the information they have on their W-9, and run AML and KYC checks, in minutes, right? That's a vastly different experience going out to sell than, you know, I'll call it the old school way of gathering that information supplier by supplier. We, we waited to have that complete to expand sales. We've now done that, and we're, you know, we're very optimistic about the success of those selling efforts, with this platform being available broadly in B2B.

Brian Kinstlinger (Director of Research, Managing Director, and Head of Technology Research)

Right. just quickly on merchant acquiring. I think I heard the comments, just to be clear, to date in the first quarter, the trends you have seen in the last two to three years or even longer of merchant acquiring are generally unchanged. Is that right?

Tom Priore (Chairman and CEO)

That's correct. Now we've seen strong volumes, through the first, you know, two full months of the quarter and expect that it'll continue through the balance here.

Brian Kinstlinger (Director of Research, Managing Director, and Head of Technology Research)

As you become much larger, it might take more merchants to sustain the growth. Are you making investments on the sales side? You know, what do you do to, you know, eventually have to, accelerate the number of merchants you're acquiring?

Tom Priore (Chairman and CEO)

Well, you know, a couple of things that are gonna influence that segment and the revenue in that segment, right. Let's just first of all talk about the merchant base we have. We'll start rolling out embedded finance/banking into this segment, right. We don't need to invest any money to roll that out. These are all things that are built. They're set to go. Every single merchant that's on our platform will have a Passport account, you know, call it within the next month to 6 weeks.

Brian Kinstlinger (Director of Research, Managing Director, and Head of Technology Research)

More revenue options or...

Tom Priore (Chairman and CEO)

That account will be there. Now it just needs to be activated, okay?

Brian Kinstlinger (Director of Research, Managing Director, and Head of Technology Research)

Yeah.

Tom Priore (Chairman and CEO)

As it gets activated, we'll offer them the ability to receive funds instantly. What we call Fund in Five. If you're processing on our gateway, as soon as you authorize transactions and you elect to have instant funding, you'll get your money in five minutes of authorization through the gateway. If you're not a gateway customer, but you're on our MX Merchant suite, you'll get money same day when you close your batch. If you leave that money in your Passport account and you spend from there using a debit card, there's no costs. If you sweep it to an external account, there'll be a fee, right? See, these are things that they're, look, they're what businesses need. In this particularly in this environment, they want cash acceleration, they want transparency.

You know, I would submit to you, given the current banking environment, having modern reporting that's clear and transparent, which we have, is gonna be, you know, we think a pretty high-value add, particularly since that money is in an FDIC-insured routable account. That's just one example. Of course, we'll keep building on from there. You know, the ability to borrow funds, you know, from approved lenders, you know, through that account and, you know, a host of other things that, again, just become additive to margin without us having to do a whole lot. You know, I think that's the future of SMB acquiring, is these things need to happen in one place. We're positioned to make that happen. The investments have already been made.

They've been made very profitably, as you can see, you know, from our, from our overall performance. Now we have an opportunity to, both ourselves and with our distribution partners, you know, provide more services which should, you know, lead to wallet share growth, you know, profitability per merchant growth in that segment. I would say that's really phase I. The other area where we're just winning, and you can see this in the trends of our merchant boards, right? We're consistently at or above 5,000 new merchant boards a month. It's because we have a lot of new boarding partners. What they're realizing is, "Hey, my merchants are just my merchant portfolio is just worth more at Priority. They have better tools.

They have more software-based tools that are specific to the verticals that I'm serving, whether that's, you know, healthcare, real estate, hospitality, salons, retail trade. We have very tailored vertical softwares for these business lines, merchants stick around longer. Now you start adding the ability to inject ways for them to enrich their portfolio value with fees from banking services. Their merchant portfolio is just worth more at Priority. They see that and we drive more reseller partners.

Brian Kinstlinger (Director of Research, Managing Director, and Head of Technology Research)

Okay.

Tom Priore (Chairman and CEO)

I mean, that is what's happening right now, Brian.

Brian Kinstlinger (Director of Research, Managing Director, and Head of Technology Research)

Great. Two numbers questions. You highlighted salary and benefits up 41%, obviously faster than revenue growth. Do I assume from the Adjusted EBITDA guidance that that trend will change and your salary and benefits expenses will grow slower than revenue growth? Then unrelated, with the rising interest rates, can you help us with kind of what you expect interest expense to be for 2023?

Tim O'Leary (CFO)

Sure. Yeah. Brian, on the salary and benefit side, as I mentioned on the call, you know, we're gonna continue to monitor and really manage the investments we've already made to date, right? No different than the sequential growth you saw from Q4 over Q3, right? That was pretty modest, only about, you know, $500,000 of an increase. You know, we're gonna continue to, you know, really keep those salary and benefits levels, you know, where they finished out the year. I think you'll see growth there at a much lower rate than the EBITDA. Point is we want more and more of that growth to slow down to the bottom line. Your view is accurate.

Obviously we didn't, you know, provide, you know, detailed projections on that as part of the guidance, but, you can see the margin expansion that's happening between EBITDA growth.

Brian Kinstlinger (Director of Research, Managing Director, and Head of Technology Research)

On the interest expense?

Tim O'Leary (CFO)

On the interest expense, you know, obviously our debt today is all floating rate. We've got the natural hedge, as I mentioned. But, you know, from an interest expense on the debt itself, you know, depending on where, you know, the Fed, you know, tops out this year and where, you know, LIBOR or SOFR finishes off, you know, I think we're estimating, you know, somewhere in the, you know, low to mid $60 million of interest expense, you know, for the year. You know, obviously some of that is offset in large part by the deposit balance, right? With the rising rates, we've gotten the benefit of interest income off of the float, right?

We've got, you know, roughly, you know, $530 million or so of deposits, that sit out there at the end of the year. That number has grown since then. But that offsets a lot of that interest expense from a hedge standpoint. You know, if you think about each quarter point of increase in rates, that's about $350,000 per quarter of additional interest income, right? Obviously we saw a big bump, you know, late in the year last year. Given where rates are today, we should see, you know, a meaningful increase year-over-year in interest income.

Brian Kinstlinger (Director of Research, Managing Director, and Head of Technology Research)

Great. Thank you.

Operator (participant)

Again, if you have a question, please press star then one. The next question comes from Matthew Howlett with B. Riley. Please go ahead.

Matthew Howlett (Senior Managing Director and Senior Equity Research Analyst)

Oh, hey guys. Thanks for taking my question. Just with the margin guidance, I mean, did you say it contemplates the enterprise segment running where it was in the fourth quarter, about 90%? If so, I mean, I know I'm not trying to get 2020, you know, forward guidance out of you, but why wouldn't that margin as that kicks in, continue to just I mean, accelerate? Is this sort of what, you know, company-wise, I mean, where you can give us sort of what's... Is 2023 sort of a transitional year? Are you holding back, you know, some upside with some rollouts? Just get into more of that margin guidance and the enterprise part of the segment.

Tim O'Leary (CFO)

No, happy to Matt, appreciate you joining the call. I think there's a couple factors there that work against each other, right? Obviously enterprise will continue to grow. You know, we expect those margins to stay pretty consistent with where they finished out the year, right? I think that business had a lot of growth in the second half of last year, right, compared to the first half of the year as a lot of the government stimulus monies were depleted from consumers' accounts, and they had to go into debt settlement processes that really expanded, you know, part of that effort. I think the, you know, the growth there really accelerated in the second half of the year.

I think you'll see some of that growth, you know, continue into 2023, but not maybe at the same rate you saw from first half to second half of last year. You know, offsetting that is some of the margin compression we continue to expect within the SMB portfolio, right? As the, as the larger reseller partners continue to grow faster than the balance of the portfolio, you'll see some of that compression there given they extract higher residuals. Those two offset. Obviously B2B, you know, managed services rolling off, you know, is a gross profit dollar impact, but, you know, should help the margins in that business, you know, albeit on a smaller dollar amount in that segment in 2023.

Matthew Howlett (Senior Managing Director and Senior Equity Research Analyst)

Appreciate that. May I ask something? Where do you see the long-term margins of the company, you know, when you get really ramped with the Banking-as-a-Service product, the enterprise, you know, more merchants adopt it? How do investors look at it? It sounds like, you know, the 30%, high 30+% is gonna be held back a bit because of the SMB side a bit. Looking longer term, is there any reason not to think that margin could be 40%, 50%?

Tom Priore (Chairman and CEO)

Yeah. Look, we're taking a judicious approach and you're, you know, kind of from your mouth to God's ears, you know, if you will. Because we'll have better clarity on the impact as we see the adoption within those two segments. You know, to your observation, right? That all just flows to the bottom line. You know, if we're making, you know, call it an extra you know, $10, $15 per month per merchant because they're using, you know, banking services where, you know, funds are making it to their Passport account and they're spending on a debit card that, you know, generates interchange, that, you know, we're collecting as the issuer, right? That's, that's gonna change the dynamic of, you know, the profitability per merchant.

We think there's a lot of inherent, you know, operating leverage in the business. We've got the products to deliver on it, now we have to drive adoption. You know, as that occurs, we'll have a better, you know, very analytically driven answer to your question. You know, we'll have metrics. It'll move beyond, you know, I'll say a theoretical evaluation at this point. That's why we're trying to be a bit judicious about, you know, representing what it is at this time.

Matthew Howlett (Senior Managing Director and Senior Equity Research Analyst)

No, I appreciate that. Just, you know, you sort of confirmed. You know, that, you know, margins look like they just explode at some point when, you know, when the enterprise, you know, payment really kicks in. It sounds like you're holding back a little bit with the guidance here in 2023, and maybe investors should be looking at 2024 instead. Certainly impressive potential there. Is there an update on the CFTPay? I'm sorry if I missed it, but in terms of how people are on, and would you look at signing up new card companies, new debt settlement people? Just any update on the CFTPay and where that's going?

Tom Priore (Chairman and CEO)

Sure. Look, I'll put it in relative terms. If you were to look at trends within, you know, I'll call it consumer wellness, let's say at the outset of COVID, the boarding trends of consumers electing to move into a consumer wellness program basically help them consolidate debt, help them, you know, negotiate resolutions to debt. It's doubled since-

Matthew Howlett (Senior Managing Director and Senior Equity Research Analyst)

Probably gonna double.

Tom Priore (Chairman and CEO)

You know, call it a year ago. I don't know that... That's to Tim's comment, like, do we think it doubles again this year? Probably not. There's incremental upside for sure. You know, it's a, it's a pretty healthy rate. You know, look, just being very candid about the segment, we are very considerate of who, you know, sits on our platform because unlike others that operate in the space, we are a licensed money transmitter, which is a benefit, but we wanna be, you know, considerate of who we have on the platform. You know, there are certain participants in the space that they're just not potential customers for us, you know, because of the, you know, their distribution models.

I think you'll see, you know, modest but some kind of logo growth. You know, what we have seen is by picking the right integrated partners in that segment who are leveraging, you know, our Banking-as-a-Service technology, they tend to be the winners over time. We see the growth from those partners.

Matthew Howlett (Senior Managing Director and Senior Equity Research Analyst)

I really appreciate it. Thank you.

Tom Priore (Chairman and CEO)

Of course. Thank you.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Tom Priore for closing remarks.

Tom Priore (Chairman and CEO)

All right. Well, wanted to say thank you to everyone for taking the time to, you know, to join the call, your ongoing support to Priority. Just to reinforce that, you know, we are, we are built for these times, and we're very excited about what the future holds, you know, particularly given some of the dislocation that we're seeing in, you know, not just aspects of the economy that we think we can be a better solution provider to businesses in need, you know, but also the growing opportunity that, the transitional nature of the banking industry that we're gonna see, you know, probably in the, in the next year that, you know, that we can capitalize on.

It's why we built the platform we did, and now we want to put it to work. Thank you to everyone and thanks to all the Priority colleagues listening. Let's go, let's go get the job done. Take care, everybody.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.